For most of us, our home mortgage is our most significant debt. Recent home buyers know firsthand how fast mortgages add up when buying a new home.

For instance, if you live in California, the average homeowner has close to $400,000 left on their home mortgage. That is a lot of money, and the mortgage interest rate can easily tack on another couple hundred thousand dollars to the mortgage, depending on the mortgage amount.

How nice would it be to eliminate your most significant debt early? Believe it or not, you can.

HOW MORTGAGES WORK

When you get a mortgage, you are borrowing a certain amount to pay for a home or land, minus any down payment you make during the transaction. This is called your principal.

Mortgages generally come in either 15-year or 30-year term lengths, meaning you have that amount of time to pay back the mortgage to the lender. The shorter the term length, the bigger your monthly payment.

Mortgages also contain an APR or Annual Percentage Rate, that is your interest rate, and the amount of additional money you pay back to the lender. That is how mortgage lenders make money.

For instance, if you take out a $400,000 30-year fixed mortgage with a 3.75% interest rate, your monthly payments will be $1,852. Over 30 years, you pay back $666,720, which is around $266,000 of interest.

Additionally, most mortgages include annual property taxes and homeowners’ insurance. Some mortgages may even include homeowners’ association fees, if applicable.

The quicker we can pay off our mortgage, the less interest we pay to the lender.

HOW CAN WE PAY DOWN OUR MORTGAGE FASTER?

There are several clever ways to pay off your mortgage early. Most people understand that refinancing your mortgage can lower your monthly payment and interest rate, but that is different from paying off your mortgage early. We want the mortgage gone.

The trick to paying off your mortgage is by making additional principal-only payments.

Mortgage lenders typically do not charge prepayment penalties for mortgages issued in 2014 or after. If you are unsure if your mortgage lender charges prepayment penalties, call them and find out. You may need to refinance your mortgage first by going to another lender without those penalties if they do.

There are two primary ways to eliminate your mortgage faster by making extra payments:

Switch your payments to bi-weekly

One of the easiest ways to pay down your mortgage faster is by switching your payment schedule to bi-weekly (in other words, two payments a month instead of one). Over a year, you will make one additional mortgage payment, reducing the term of your mortgage.

This may not seem like a lot, but over a 30-year mortgage, making 30 additional payments will shrink your mortgage term by several years. It will not cut your mortgage in half, but it will save you interest by eliminating your mortgage years sooner.

Bi-weekly payments will also help you avoid PMI, or Private Mortgage Insurance, sooner. Conventional loans charge PMI fees until 20% of the original balance has been paid off.

Call your mortgage lender to properly set up bi-weekly payments if you choose this route.

Make extra lump-sum payments during the year

The second way to pay down your mortgage sooner is by making principal-only lump sum payments yearly. These payments can be made monthly or annually, depending on your financial situation.

For instance, taking a $10,000 bonus check from work and making an additional principal payment on your mortgage instantly reduces your balance by $10,000. Many people use their tax refund checks or inheritance windfalls to make an extra mortgage payment.

If this sounds like a good plan, consider setting up an automatic bank transfer monthly to make an extra principal-only payment. Paying an additional $250 or $300 a month will reduce your mortgage term by many years. The more money you pay, the shorter your mortgage term becomes.

Before making an extra payment, call your mortgage lender to ensure your payment will be applied only to the principal (rather than the interest you owe).

Note: Periodic lump-sum payments are like mortgage “recasting.” Recasting means paying an additional lump sum toward the principal of your loan, and the lender will adjust the terms of your loan based on the amount you paid. Mortgage recasting is generally a better plan than refinancing your mortgage if your interest rate is already low.

BOTTOM LINE

In conclusion, there are several ways to pay off your house years earlier. The shorter the mortgage term, the less interest we pay. Refinancing your mortgage is a great way to get a better interest rate, but making additional payments is how to eliminate your mortgage quickly.